Asset Liability Management in Banks

2021 Words9 Pages
5 Asset and Liability Management (ALM)
29. There are different organizational and governance models that guide the management of bank asset and liability activities. The models reflect fundamentally different risk philosophies that tend to evolve with the growing sophistication and depth of financial markets together with the position and activities undertaken by a bank in the market. The terms ‘ALM unit’ and ‘treasury unit’, can be confusing as they are often used by organizations who assign different responsibilities to them - this will be explained below.
5.1 Key aspects that influence a banks approach
30. The evolution of models is driven by differing philosophies about the role of the treasury or the
ALM unit and banks in
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Irrespective of the choice made, a bank needs to realise that the right level of skills and resources need to be committed to support the function. Failure to do this can result in a poorly managed operation characterised by volatility in; core earnings/margin; economic value, and; unpredictable economic results.
38. The mismatch position of the balance sheet represents the interest rate and liquidity risk profile inherent. Assuming a single portfolio without hedges, a large and well diversified bank, with transactions weighted broadly across all market segments, will find that its balance sheet will naturally take on countercyclical characteristics as the business environment consolidates through the economic cycle. This makes sense as the bank is effectively providing customers with solutions they are demanding as they operate in the external environment. The market itself will also provide limitations and one of the areas where this can manifest strongly is on the liability side of the balance sheet. Various techniques are used to examine the mismatch in a bank’s balance sheet and it can be a difficult process if not supported with adequate systems. Depending on systems and analytical support the ALM process will undertake a number of analysis designed to identify; static and dynamic
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